Interest Only Mortgages - Things You Should Know
CL Haehl
Interest-Only or "Interest-First" mortgages have been around
for quite some time now, but have recently been exploding in
popularity. Originally offered primarily in the non-prime
market, interest only mortgages are now available as conforming
loans and can come as a feature on a wealth of loan programs,
including adjustable rate mortgages, 40 and 50 year term loans,
stated income loans, and to borrowers with credit scores as low
as 540.
The first thing you should know about an interest-only mortgage
loan before you commit is that YOUR PAYMENT WILL CHANGE. (read,
YOUR PAYMENT WILL INCREASE). With an interest-only loan, your
first payments are towards the interest, not the principal.
After a set amount of time (traditionally, anywhere from two to
fifteen years), the lender will require you to start paying back
the principal along with your interest payments. As long as you
are prepared for this payment adjustment, interest-only loans
can be an extremely useful tool in financing, especially
purchases. With a lower monthly payment, your purchase power
increases when shopping for your dream home, and you can always
re-finance down the road to a regular amortizing loan.
There are a few caveats to be watchful of. Some predatory
lenders target first time homebuyers by telling them they can
afford (on paper) that gorgeous seven bedroom mansion. The
mortgage they may have in mind could have a fixed rate for only
two years (and then increase 2-3%), be interest only for the
first two to five years, and have a pre-payment penalty that
would cost them thousands of dollars if they want to refinance
or even sell in the first two to five years of the loan. Unable
to cope with the payment shock, the new homeowners may be forced
into a very uncomfortable financial position.
Interest-only mortgages are a viable for many people. Just make
sure you do your research and understand all facets of the loan
you are offered.
About The Author:
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